Live Nation Up 36% YTD: But We've Got Bad News

by David J. PhillipsMay 06, 2013

Investors abandoned Live Nation (LYV) after the leading concert promoter failed to deliver on synergistic growth expected from the 2010 purchase of Ticketmaster. The stock has recovered more than 36% this year, as seen in a stock chart, however, as optimism builds that a rebuilt e-commerce platform focused on social media and mobile apps will reboot growth and keep online competitors, such as Eventbrite and Etix, from stealing share in the ticketing space.

Live Nation has historically found it difficult to turn a profit with its core business of staging and promoting large arena shows, as best-selling artists like Rihanna or Aerosmith now command up to 90% of gated revenues. With the $2.5 billion all-stock buyout of the artist management and leading global ticket vendor, chief executive officer Michael Rapino envisioned a vertically-integrated combination that could finally offer shareholders a stable, recurring revenue model that generated sustainable profits – through a “razor and blades” strategy (e.g. negotiating more attractive royalty terms on concert-related merchandise by successfully driving higher venue attendance) and lowering operating cost (elimination of duplicate SG&A activities).

Management has spent heavily to replace a 24-year old enterprise platform with a web-based platform focused on mobile applications – be they run on Apple’s (APPL) iOS or Android-based operating systems: technology-related investments more than doubling in the last two years to $60.2 million. In February, the company introduced a digital ticket transfer service – customers can now seamlessly send paperless tickets to other event goers at no-cost – and come July, an updated secondary ticket platform will be launched.

“We want to have a Ticketmaster Do-It-Yourself…if you want to call it, that you can go on yourself and put your 40th birthday and sell tickets for a small event,” said Rapino. The CEO also believes the new platform will reduce operating costs by about $0.35 a ticket, with more savings to come down the road as more buyers embrace – and venue operators adopt – digital technologies. Just bring your phone and swipe it at the door as you enter the concert, said Rapino.

The company is also looking to improve ticketing conversions per event by shifting advertising from traditional to online marketing. In 2011, Live Nation teamed with Groupon (GRPN) to launch GrouponLive, an online marketplace for ticket deals. At an analyst meeting last month, management told analysts it will double its spending on social media initiatives (from 20% to 40% of its ad budget) this year.

Investors, however, might want to rethink their enthusiasm for Live Nation. To be sure, this embrace of all-things digital has helped the company deliver on growth in ticket sales and operating results – ticketing profits have more than doubled since 2010, coming in at $122.8 million last year. But the live concert part of the equation continues to underperform: As mentioned, the company makes little money at the door. Additionally, though ancillary net revenue per attendee at North American events rose 45 cents to $18.56 year-over-year, concert segment net losses increased another $15 million to $(120.1) million in 2012. Profit margins aren't encouraging

Although Live Nation is unmatched in its global reach – and has new technology that makes it cheaper to sell tickets – operating margins at its concert promotion’s segment could face further pressure as smaller rivals look to scale up and compete directly against the company in higher-margin electronic dance music (EDM), festival and arena-sized events. Online ticketing vendor Eventbrite offers software that helps event organizers cheaply manage all aspects of a concert or film-festival, from marketing and online sales to ticket purchases and payments.

Granted, Live Nation sells more tickets in one year (148 million) and generates more ticket sales in six-months than the San Francisco-based upstart has processed since its founding in 2006 (104 million tickets, $1.5 billion in cumulative sales); nonetheless, this scale advantage hasn’t stopped the latter from stepping on Live Nation’s turf – like organizing a Black Eyed Peas concert in New York City’s Central Park (a 2.5% cut plus a 99 cent per ticket fee ought to make Live Nation nervous and big-name artists even greedier!).

Any aspiring Don King or Don Kirshner can now launch careers by purchasing apps on-the-cheap from online ticketing companies such as North Carolina-based Etix, which is organizing a Jay-Z and Justin Timberlake “Legends of the Summer Stadium Tour” or Philadelphia-based TicketLeap, which sells mobile software that allows event organizers to multi-task from an iPad or smartphone.

Irrespective of supposed benefits from vertical economics, the inability of Live Nation to profitably execute on the broader ecosystem around the live event suggests the ubiquity of affordable mobile apps could make it even more difficult to generate sustainable growth. An inability to show even modest EBITDA gains could hinder debt reduction (long term debt totaled $1.68 billion at year-ending 2012), too, compromising what appears to be an attractive valuation, based on historical price to book value and price-to-cash flow ratios.

“Wise men say only fools rush in – but I can’t help falling in love with you,” crooned the late Elvis Presley.

Wipe out the $2.46 billion in goodwill and intangibles (such as brand name and client/vendor relationships) from the asset-side of the ledger and stated book value of $7.90 per share evaporates completely; subtract the $64.4 million increase in accounts payable (monies owed) and the $124.8 million in deferred revenue (advances on services not yet rendered) and free cash flow of $276 million falls to $86.8 million. Given these facts, maybe Elvis was right: When it comes to Live Nation, only fools rush in.

David J. Phillips, a contributing editor at YCharts, is a former equity analyst. His journalism has appeared in Bloomberg BusinessWeek, Forbes, and Kiplinger's Personal Finance. From 2008 to 2011, David was a reporter for CBS News Interactive. He can be reached at editor@ycharts.com.